Should You Worry About State Social Security Taxes
If you’re worried about taxes in retirement, state Social Security taxes may be a factor in where you spend your golden years. However, it’s important to consider the overall tax picture.
Property taxes can put a serious strain on your retirement budget if you live in an area with high housing costs. You should also consider sales taxes and whether your state taxes capital gains and other investment income. Finally, if you have a high net worth, estate taxes may also be a consideration.
Obviously, you don’t want to give up part of your Social Security benefit to your state government if you don’t have to. But look at your total tax bill when determining which state will become your retirement home.
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Only In Certain States Or If Your Income Exceeds The Federal Limits
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Social Security disability benefits may be taxable if you have other income that puts you over a certain threshold. However, the majority of people who receive Social Security benefits do not have to pay taxes on their benefits because most people who meet the strict criteria to qualify for the program have little or no additional income.
Virginia Taxes On Retirees
- Our Ranking: Tax-friendly.
- State Income Tax Range: 2% 5.75% .
- Average Combined State and Local Sales Tax Rate: 5.75%.
- Median Property Tax Rate: $815 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: None.
For retirees, the Old Dominion offers a few tax breaks here and there to create a friendly overall tax environment. For state income taxes, Virginia doesn’t tax Social Security benefits, and residents 65 and older can deduct up to $12,000 per person of other income, subject to income-eligibility limits. Veterans can deduct some of their military retirement income, too.
Another break comes in the form of low sales tax rates. Virginia’s average combined state and local rate of 5.75% is the 11th-lowest in the nation. Clothing and groceries are taxable, though.
Property taxes are below average, too. Local governments can provide additional tax breaks for seniors as well.
- State Income Tax Range: None.
- Average Combined State and Local Sales Tax Rate: 9.29%.
- Median Property Tax Rate: $958 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: Estate tax.
The Evergreen State is one of nine states with no personal income tax. Therefore, retirees don’t have to worry about paying taxes on their pensions, Social Security benefits or other retirement income, period.
However, sales taxes in Washington are extremely high. At 9.29%, the state’s combined state and local sales tax rate is the 4th-highest in the nation.
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Determine When To Take Payments
Before even thinking about taxes, to make the most of your benefit, the first step is to figure out the best time to start collecting it. While 65 was once the universal age when people left work, and began collecting Social Security and other pension benefits, that is no longer the case. Today, the Social Security full retirement age for those born in 1937 or earlier is 65, but it rises gradually for those born in later years and tops out at 67 for anyone born after 1959.
If you qualify for benefits and are planning when to begin taking them, be aware that the longer you wait the higher the monthly payment you will receive. You can start your benefits as early as 62, but the amount you receive will be less than what you would get at full retirement age. If you hold out until age 70, however, you will get a yearly percentage increase to your benefits calculated based on the year you were born.
When you reach age 70, your benefits no longer continue to increase even if you continue to delay taking them. Since the average lifespan keeps lengthening, you may want to consider delaying your benefits so that you receive the highest amount when you need it. Your decision will, of course, be affected by numerous factors that include your financial situation and your health. Your CPA can help you determine whats best for you.
New Mexico Taxes On Retirees
- Our Ranking: Mixed.
- State Income Tax Range: 1.7% 5.9% .
- Average Combined State and Local Sales Tax Rate: 7.84%.
- Median Property Tax Rate: $796 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: None.
The Land of Enchantment is not a magical place for well-off retirees. Social Security benefits, retirement accounts and pensions are all taxable . The state does offer a retirement-income exemption of up to $8,000, but you must meet certain income restrictions to qualify. There’s also a tax break for military retirement pay, but it’s limited and only temporary.
New Mexico’s sales tax has a broad reach, hitting most services in addition to goods. As a result, this tax tends to hit retirees fairly hard. At least the state sales tax rate drops from 5.125% to 5% on July 1, 2022, and then down to 4.875% on July 1, 2023 .
On the bright side, property taxes are on the low side, and there are property tax credit and deferral programs available to low-income seniors. Plus, if you live to be 100 years old, the state’s income tax is waived.
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When Is Social Security Income Taxable
To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.
Youll see that you fall into one of three categories. If your total income is:
- Below the base amount, your Social Security benefits are not taxable.
- Between the base and maximum amount, your Social Security income is taxable up to 50%.
- Above the maximum amount, your Social Security benefits are taxable up to 85%.
Place Some Retirement Income In Roth Accounts
Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax-free, provided that theyre taken after you turn 59½ and have had the account for five or more years. As a result, the Roth payout wont affect your taxable income calculation and wont increase the tax you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.
The Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits. A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
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New Jersey Taxes On Retirees
- Our Ranking: Least tax-friendly.
- State Income Tax Range: 1.4% 10.75% .
- Average Combined State and Local Sales Tax Rate: 6.6%.
- Median Property Tax Rate: $2,471 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: Inheritance tax.
Year in and year out, the Garden State ranks as one of the least tax-friendly states for retirees and others. But New Jersey has made some efforts to reduce the income tax burden on retirees, with a very generous exemption for retirement income and a complete exemption for Social Security benefits. Sales taxes are below average, too.
It’s not enough, though, to overcome New Jersey’s crushing property taxes the highest in the country, with residents facing a median property tax rate of $2,471 in taxes per $100,000 of assessed home value. Its one reason why weve seen retirement-age friends fleeing the state for more tax-friendly environs.
Plus, even though New Jersey recently eliminated its estate tax, the state still imposes an inheritance tax.
How To Minimize Taxes On Your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.
Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:
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Social Security Disability Benefits: Do You Know The Tax Implications
Its tax time again, meaning that you need to get your finances in order. But, many taxpayers are not familiar with the tax rules that govern Social Security Disability payments.
If you are receiving Social Security Disability benefits, you may be overlooking important rules that could land you in hot water with the IRS. Read on to find out more about how Social Security Disability could affect your income tax liability and why you might want to contact a Social Security Disability attorney for more information.
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Most Social Security recipients are not taxed on their benefits: only about one-third of current Social Security Disability recipients pay taxes on their benefits. But, if you are among those who do incur tax liability and you ignore your obligations, you could wind up writing a fatter-than-expected check to Uncle Sam.
So what determines whether or not your benefits are taxed? You attorney can best explain the nuances, but as a general rule, you will only have to pay taxes on Social Security Disability benefits if you have other substantial sources of income. This means that you will usually be paying taxes on your benefits if:
You file a federal income tax return as an individual and have an income greater than $25,000
You file jointly and you and your spouse have a combined income of $32,000 or more
You are married and file a separate return
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How Much Of Your Social Security Income Is Taxable
If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your social security benefits in 2020, …
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Connecticut Taxes On Retirees
- Our Ranking: Least tax-friendly.
- State Income Tax Range: 3% 6.99% .
- Average Combined State and Local Sales Tax Rate: 6.35%.
- Median Property Tax Rate: $2,133 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: Estate tax.
You dont need a mystic to tell you the Constitution State is a tax nightmare for many retirees but at least things are improving on the income tax front. Beginning in 2022, income from a pension or annuity is exempt for joint filers with less than $100,000 of federal adjusted gross income and other taxpayers with less than $75,000 of federal AGI . Starting in 2023, the state will also start phasing out taxes on distributions from traditional IRAs for retirees with a federal AGI below the same amounts.
Connecticut has the third-highest median property tax rate in the U.S., so the $10,000 cap on the federal tax deduction for state and local taxes stings a bit more here. The state offers property tax credits to homeowners who are at least 65 years old and meet income restrictions, though.
Connecticut also imposes an estate tax and a gift tax .
California Doesn’t Tax Social Security Benefits But It’s Part Of Federal Income How Is Social Security Subtracted From Income On State Return
The taxable portion of your Social Security benefits is automatically adjusted when the information transfers over from the federal return to the state. On your CA return, this will show as a subtraction to income on Schedule CA. Your itemized deductions are also automatically adjusted for the allowable California deductions.
For the car registration feesCalifornia law is the same as federal law regarding the deduction allowed. Therefore, if you itemized your deductions on your federal return and claimed a deduction for the vehicle license fee, no adjustment to your California return is needed on schedule CA. See this link:
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Delaware Taxes On Retirees
- Our Ranking: Most tax-friendly.
- State Income Tax Range: 2.2% 6.6% .
- Average Combined State and Local Sales Tax Rate: None.
- Median Property Tax Rate: $568 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: None.
No sales tax, low property taxes, and no death taxes make Delaware a tax haven for retirees. It’s easier to spoil the grandkids when you pay zero state or local sales tax on your in-state purchases .
You’ll also have more disposable income to spend on the grandkids, since property taxes are so low. The median annual property tax rate in Delaware is the sixth-lowest rate in the nation. Plus, some Delaware seniors qualify for a school property tax credit of up to $400 .
The only potential downside and it really isn’t that bad are middle-of-the-road income taxes if you have an above-average income. Overall, though, the income tax rates are comparatively reasonable, and residents age 60 and older can exclude up to $12,500 of pension and other retirement income distributions, etc.).
Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January detailing your benefits during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security website.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
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Social Security And The Midterm Elections
As the November election approaches, President Joe Biden has ramped up social media attacks on Republicans for their plans for Social Security.
This week, that included a tweet accusing Sen. Rick Scott of planning to “put Social Security and Medicare on the chopping block.” Scott has denied those claims.
Arkansas Taxes On Retirees
- Our Ranking: Tax-friendly.
- State Income Tax Range: 2% 4.9% .
- Average Combined State and Local Sales Tax Rate: 9.47%.
- Median Property Tax Rate: $620 per $100,000 of assessed home value.
- Estate Tax or Inheritance Tax: None.
There are a lot of good things to say about the overall state and local tax burden in the Natural State. For instance, Arkansas exempts Social Security benefits and up to $6,000 of retirement income from its state income tax. And, as a plus for veterans, all military pension income is tax-exempt. Retired law enforcement officers working on cold cases can even claim a tax credit of up to $3,500. In addition, starting in 2022, the top income tax rate is reduced to 4.9%.
The state’s property taxes are among the lowest in the nation, too. In fact the median property tax rate is the 12th-lowest in the U.S.
However, sales taxes in Arkansas which are levied on both food and clothing are rather high. According to the Tax Foundation , Arkansas has the third-highest average combined state and local sales tax rate in the nation. But, overall, Arkansas is a tax-friendly state for retirees.
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Lawmakers tried to aid some low-earners who may not file taxes by increasing payments for people receiving CalWorks benefits, a program for needy families. They also increased benefits for people who receive Supplemental Security Income a state-supplemented version of social security benefits for senior or disabled people who would otherwise not qualify for, or have extremely small social security payments.
The boosts for people in those two programs are good, said Trinh Phan, a senior staff attorney focused on economic security at Justice in Aging, which advocates for low-income older adults. But, she said, the budget package still leaves out some people who are very low-income.
For example, someone getting by just on Social Security Disability Insurance could miss out on this rebate and the boosts to CalWorks and Supplemental Security Income: They might earn little enough that they dont have to file taxes, but if they dont have kids they likely wont qualify for CalWorks. And, if their disability benefits pay more than $1060.21 per month, they wouldnt qualify for Supplemental Security Income either, said Phan.
Do You Pay Federal Income Tax On Social Security
Some people who get Social Security must pay federal income taxes on their benefits. However, no one pays taxes on more than 85% percent of their Social Security benefits. You must pay taxes on your benefits if you file a federal tax return as an individual and your combined income exceeds $25,000.
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